The Path to the Grail. Technical Analysis Indicators
To many traders the analysis of technical indicators seems to be a holy grail. Like, if the classical analysis didn't work out, then the complex magical indicators will bring profit. After all the computer builds them, and the computer is smarter than the man.
Why am I selling you, Burenka?
But me, from the first day when I learned about technical/computer indicators, I always wondered why their creators sell cows that give milk by the ton?
For me the answer is simple, in fact in the standard layout and in the standard application the indicators don't know how to give more money than the methods of classical technical analysis.
They are good for those who expect a modest return of 30-40% per annum (without taking into account the "leverage", which can only be taken on a "long" with a "short"), but to whom the visual analysis is not convenient.
Someone will say: "Eh... I wish I had such a modest return...". Someone will be surprised that he used indicators and waited for millions of percent per annum and was severely deceived?
Let me reconcile everyone. I will give some simple tips not even because of how to optimize indicator strategies, but because you should know about them first of all. In my experience, a lot of people who have been trading with indicators for years, do not follow basic safety precautions when dealing with indicators.
A variety of technical Indicators for MetaTrader 4. Free
Safety precautions for technical indicators
Every cricket knows its own stump.
Before you use indicators, you should first calculate whether you are satisfied with the average number of signals per year.
Most losses for stockbrokers occur not because of bad indicators, but because they take indicators with rare signals. And between signals, traders manage to make thousands of intuitive trades.
Sometimes the opposite happens, the investor chooses the wrong timeframe or too fine a period of the indicator, does not have time to make part of the signals or even artificially filters them, and the result is deplorable, because good inputs and outputs are missed.
Why don't people count the number of signals before they start using indicators? So many people just don't know and don't guess that they need to do it. At a beginner's course, the teacher gives them the Grail in their hands and says, "Use it!" Bad teacher? No! Just not everyone hears about the time-frame, about which securities to apply the indicator. The market is undoubtedly self-similar, but this rule applies to classical technical analysis. Technical analysis indicators are more often created for a certain task.
Tip: Look for the complete paper history of the desired time frame. Until you have it in your hands, you will not have peace of mind and confidence in your indicator system. Unfortunately, slices of less than a day in this format, even for Russian securities, are now fee-based. But it's better to pay for quotes than that money or big losses. Losing is very hard on the psyche!
Know who started it all!
The first point immediately leads to the second. It is necessary to strictly imagine who created the indicator and why.
Oh, how much trouble would have been avoided if the J. Wells Wilder, Jr. indicators had been used on highly liquid securities, with Wilder's special risk management system in place! How much money would not have been lost if people had stopped using Bollinger Bands in securities that are not exposed to the news, that do not react keenly to it. An era of prosperity and wealth for traders would have begun if they had finally reunited Bill Williams' torn system and stopped separating his indicators and using them separately.
Tip: I will not trade on an indicator whose creator I do not know. And I would not advise you either! By the way, this advice applies to classical technical analysis as well. I, for example, do not trust some of the figures of technical analysis. This distrust allowed me to learn about the "The Hound of the Baskervilles" effect, on which you can earn twice as much as on any figure.
And if we go back to the creators of the indicators, did you know that you can almost meet some of them personally. The business of selling computer indicators is young and the creators of many are alive, thriving and have websites.
Be realistic, demand the impossible!
As I said above, many traders do not expect from indicators what they can do. And this concerns not only the number of signals, but also the quality. And to put it simply: profitability!
If we take a cut of the day and the longest history of the Russian stock for twenty years - the analysis of the indicator yield "on the knee" can be done in about thirty minutes. We do not even need an Exel or a calculator, the counting function of the Tranzaq trading terminal, the "ruler" is enough. By using programs, customized to build trading robots, we can process 5-10 papers in twenty minutes. And all this is available to any trader.
Tip: Check the yield of all past signals on the history, play with filters and criteria for obtaining them, mark the strength of the signal on rising and falling trends. By the way, this advice is especially important for our market, because there is a large list of securities that are not subject to the objective market law that says that stocks are always rising. The market is always going up. And individual stocks can arrive in deep downtrends.
Have an opinion on the classics
In my last tip, I unwittingly slipped back into the subject of classical technical analysis. Because I believe that until the trader is convinced that this method is not convenient to him, there is no need to run to the indicators. Also, it is difficult to read indicator signals without understanding what the main movement is now. A combination of trend-following indicators can partially alleviate this problem, but I believe you need to dilute your charts with classic technical analysis.
The fact is that it is the classical technical analysis that can more quickly suggest the presence of a systemic stock market problem, crisis, etc. Indicators will start to lie at first, and then they take a long time to adjust to the circumstances. You'll say: "So you're looking from your bell tower of the medium-term. You can only trade intraday by indicators!" Maybe, but I haven't seen a single system trader who doesn't want to knock out his robot while waiting for a post-New Year's or dividend "gap."
Tip: The more justification you have for making a deal, the smarter it will be. Don't just look at yourself, don't just think about your comfort - look at the crowd.
The Voice of the Crowd
Speaking of the crowd. Many novice traders who try to analyze the market with indicators spend a lot of time selecting their parameters for them. They just come up with unimaginable periods based on moon cycles, news, favorite numbers. It's much simpler, the stock market crowd doesn't bother with it. There are generally accepted techniques and at best, traders try to apply them. And at worst, they don't even know that some parameters need to be adjusted. Seriously, many indicators on the charts are just for beauty.
Tip: Find out what parameters and for which timeframe the creator of the indicator recommended. Note that most likely as a time frame took the daily cut, and, based on this standard, begin testing. Also, do not disregard the opinions of the forums, ask your colleagues about the indicator you are interested in, what parameters they like and on what interval. And then start the game of filters, clear stop losses and smart risks!
Get the gist, not the formula
Many traders are afraid of indicators because they have scary formulas. In fact, if you try to understand the physical meaning of an indicator, the world becomes easier. How to understand it? I told you above that you have to get acquainted with the creator of an indicator and understand what he wanted to say with the indicator. Sometimes, when it is not possible, good books can help you. For me, this is the book by Robert W. Colby "The Encyclopedia of Technical Indicators". Colby's "Encyclopedia of Technical Market Indicators". It not only tells you about kinds of indicators, but also teaches you what kind of data you need to have before you start trading on them.
Tip: If you can't make a final conclusion about the indicators because you don't understand some of the nuances of them, look them up! Books, articles! Take someone else's experience! You have to learn everything at all times. And then you will be able to step beyond the standard possibilities for indicator profitability.